My post Harlequin Authors File E-Book Class Action Case Against Harlequin Over “Who’s the Publisher?” describes Harlequin authors’ class action complaint against Harlequin and its Swiss registered companies. Harlequin authors received 3 or 4 percent of the cover price of e-books, when they thought they should be receiving more than 50 percent of the cover price. The amended complaint claimed breach of contract under agency, assignment and alter ego theories. The amended complaint also alleged that the license fees paid by Harlequin Enterprises to Harlequin Switzerland did not comply with the terms of the publishing agreements signed by the authors. The authors’ royalties were calculated based on the amount paid by Harlequin Enterprises to Harlequin Switzerland.
The district court granted the Harlequin companies’ Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted for all claims. The Second Circuit Court of Appeals affirmed the district court’s decision regarding the authors’ claims for breach of contract under agency, assignment and alter ego theories. The Second Circuit reversed the district court’s ruling on the authors’ allegation that the license fees paid by Harlequin Enterprises to Harlequin Switzerland did not comply with the terms of the publishing agreements signed by the authors.
Relevant Contract Provisions
Under the publishing agreements signed by the authors, HBSA, a Swiss company and Harlequin subsidiary, was the publisher and Harlequin Enterprises was a related licensee. Harlequin Enterprises published the authors’ works, while HBSA paid the authors’ royalties.
Two provisions of the publishing agreement signed by the authors are relevant in this case. These provisions applied to media other than hardcover and paperback copies.
Under the “All Other Rights” clause, the Publishing Agreements provided that the authors’ royalties would be calculated as follows:
On all other rights exercised by Publisher or its Related Licensees fifty percent (50%) of the Net Amount Received by Publisher for the license or sale of said rights. The Net Amount Received for the exercise, sale or license of said rights by Publisher from a Related Licensee shall, in Publisher’s estimate, be equivalent to the amount reasonably obtainable by Publisher from an Unrelated Licensee for the license or sale of the said rights.
The Other Rights clause provided:
If Publisher licenses, sublicenses or sells to an Unrelated Licensee any of the following rights to the Work anywhere in the world, in any language, Author’s and Publisher’s share of net amount received by Publisher for said license, sublicense or sale shall be apportioned as follows . . .
[Author’s share] 50% [Publisher’s Share] 50%
(Opinion pdf page 5).
Breach of Contract under Agency, Assignment and Alter Ego Theories
The Second Circuit applied New York law to the breach of contract claims. “A written agreement that is complete, clear, and unambiguous must be enforced according to its terms.” (Opinion pdf page 8).
The Second Circuit thought that the authors were asking the court to rewrite the publishing agreements, which it refused to do.
Based on our review of the Publishing Agreements, we conclude that plaintiffs’ first through third claims are not viable because the Publishing Agreements unambiguously provide that HEBV or HBSA is the ‘Publisher’ and Harlequin Enterprises is a ‘Related Licensee’ for purposes of computing royalty payments. The fact that Harlequin Switzerland may have delegated certain publishing and administrative duties to Harlequin Enterprises does not modify this relationship. The Publishing Agreements expressly contemplate that the ‘Publisher’ could assign or delegate publishing duties ‘to any related legal entity,’ including ‘to its parent company or to an affiliate [or] subsidiary.’ These provisions are unambiguous and enforceable.
(Opinion pdf page 9).
The License Fees Paid by Harlequin Enterprises to Harlequin Switzerland Did Not Comply With the Terms of the Publishing Agreements Signed by the Authors
The authors alleged that the Harlequin defendants breached the publishing agreements because the licensing fees Harlequin Enterprises paid to Harlequin Switzerland, which were the figures on which the authors’ royalties were based, were not “equivalent to the amount reasonably obtainable from an Unrelated Licensee.”
The Second Circuit ruled that the factual allegations made in this claim were sufficient to survive a Rule 12(b)(6) motion to dismiss.
The amended complaint identified the specific contractual provision at issue, and alleged how defendants breached that provision: the claimed license from Harlequin Switzerland to Harlequin Enterprises, in the amount of 6% to 8% of the cover price of the works, is not equivalent to the amount reasonably obtainable by Publisher from an Unrelated Licensee for the license or sale of the said rights. Further, the amended complaint alleged that the amount reasonably obtainable by a publisher from an unrelated licensee for the license or sale of the said rights is, upon information and belief, much higher than 6% to 8% of cover price and is at least 50% of net receipts.
The amended complaint provided context for these allegations, contending that after Harlequin Enterprises set up its subsidiaries, ostensibly for tax purposes, it continued to control the publication, marketing, and distribution of plaintiffs’ works. Moreover, the amended complaint went on to allege that these actions substantially lowered the plaintiffs’ royalties, despite Harlequin Enterprises’ assurances that its inter‐affiliate licensing arrangements would not affect their rights. These allegations, that the amount of royalties they received were not equivalent to the amount reasonably obtainable from an unrelated licensee, nudged plaintiffs’ claims across the line from conceivable to plausible.
(Opinion pdf pages 11-12).
The Second Circuit also considered it significant that the parties conducted discovery that appeared to support the authors’ position on this issue.
This case is Keiler v. Harlequin Enterprises Limited, No. 13-1753-cv, Second Circuit Court of Appeals.